CIO view: Currency bigger issue than politics

Reducing political risk is good, but institutional investors are more sensitive to rate changes in the US, the CIO of Korea’s Public Officials Benefits Association tells PDI.

Now that the unprecedented summit between US president Donald Trump and North Korean leader Kim Jong-Un has happened in Singapore – although few details emerged about the contents of the discussion – PDI asked what institutional investors think of the tail risk from geopolitical issues impacting today’s markets globally.

What we found was market experts shrugging off the impact of geopolitical tensions in the region. “I am not sure if the US-NK summit has much impact on investment really. It is good that one risk is reduced. Markets and investors are focusing on the broad global tightening cycle,” one industry source said.

Rather, institutional investors are looking at the results of a Federal Open Market Committee (FOMC) meeting to have a better understanding of how to navigate today’s investment environment.

Dong Hun Jang, the CIO of Public Officials Benefit Association (POBA), expressed the view that market uncertainty has been reduced. “We internally expected three rate hikes this year, but the FOMC meeting minute indicates that there will be four hikes,” he added.

Trinh Nguyen, a Hong Kong-based senior economist for emerging Asia at Natixis, a Paris-headquartered investment bank, tells PDI that institutional investors are focusing mostly on dollar liquidity in corporate balance sheets across the emerging markets.

For those with large exposure to offshore assets with long-term investment horizons, foreign currency fluctuations have a tangible impact on both expected and realised investment returns.

“Some opportunities that we have looked at were not suitable as we could project foreign currency hedging losses from the potential investment opportunities,” added Jang.

According to Jake Lee, Seoul-based head of the infrastructure team at Hyundai Marine & Fire Insurance, forex hedging losses ranged from 150 basis points to 200 basis points between the Korean won and US dollar in April.

To mitigate losses from hedging, POBA plans to diversify the currency exposure of assets in the portfolio, looking at various assets denominated in currencies such as the euro, British pound and Japanese yen among others, according to Jang.

POBA had a 57.4 percent exposure to onshore and offshore alternative assets as of 31 December. In April, the pension fund established a joint venture with an unidentified Californian pension fund.

With regard to POBA’s approach to alternative assets, Jang said: “Obtaining dividend income from investments is more of a key consideration when investing [in alternatives].”

In H2, POBA plans to look at offshore infrastructure and private debt investment opportunities, he added.